Keeping the gold standard

10:00am Tuesday 18th November 2008

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With house prices falling and shares slumping, one investment continues to soars: gold.

But, as Owen Amos explains, historians would have expected that. If only Gordon Brown was a historian…

WELCOME to the credit crunch: the world where nothing’s worth what it was and investments slide like a thermometer’s mercury. If you’d bought the average house in August 2007, for example, when prices were at their peak, it would have cost £199,770. Now, according to the Halifax index, it would cost £172,108 – a 13.9 per cent drop.

On August 2, 2007, when houses were pricey, and only Robert Peston knew what the credit crunch was, the FTSE 100 closed at 6,224.30.

Last week, it closed at 4,242.50 – a 31 per cent decrease.

Silver, according to Kitco, the precious metal dealers, has dropped in value, from $12 per ounce to $9.50. So too platinum, from $1,280 to $820. Even oil – which turns back less often than Margaret Thatcher – has fallen from $78 a barrel in August 2007 to $70 now, a 9.8 per cent drop.

That’s the problem with recession: fail-safe investments, such as bricks and mortar, start to lose value. A house, for example, is only worth what people will pay for it. If people have less money, they won’t pay as much for houses, or shares, or silver. So the price drops to attract buyers – to lure in those tightening their belts – and, across the board, values fall. Result: we all get glum.

Except, that is, anyone who owns gold.

On August 2, 2007, gold was worth $665 per ounce.

Did its value rot like houses? Tumble like shares? Melt like silver? No. Last week, gold was worth $760 – an increase of 12.5 per cent.

If house prices, for example, had followed the same pattern, the average home would now cost £224,741 – £52,633 more than it actually does.

While most values sink, the golden eagle soars past, a beast immune to modern woes.

Credit crunch? Not even the 21st Century’s sharp teeth can take a bite from gold. Most commodities carry scuff marks; gold remains lustrous – and, for investors, luscious.

So has it always been thus? Does gold always buck the trend and beat the baddies, like an investors’ wonder-drug? No, it doesn’t. In 1988, according to Kitco, gold was worth around $500 per ounce. By 2000, it had sunk like a Lehman Brothers banker to $270. Anyone with gold had two options. A) Sell – after all, it’s slumped by 46 per cent in 12 years. What will be left in another 12 years? B) Sit tight – after all, gold has been currency, in one way or another, for thousands of years. Values rise as well as fall, so we should hold on. What if – say – we sell now, then its value trebles in the next eight years?

We’d look terribly silly.

Hindsight is a wonderful thing. Isn’t it, Mr Prime Minister?

Between 1999 and 2002, Gordon Brown disregarded the Bank of England and sold 395 tons of gold, around 60 per cent the UK’s reserves, for £2.3bn. That’s right – when the price was at a 20-year low. If he’d held on, we’d be at least £3bn richer. That would build a few schools, hospitals, and prisons. Who knows – MPs might even have kept their John Lewis List.

But, you say, he wasn’t to know gold was set to soar. Perhaps not. But history proves gold is hardy. Like a loving parent, or – let’s not get too sentimental here – a favourite jumper, we run to it when times are hard. While shares tumble at a whiff of wind, gold has deep foundations. In the early 1930s, for example, when inflation roared across the world, depositors demanded gold, not notes. It felt safe.

After all, in a post-apocalyptic world, what would you accept for a loaf of bread: a gold bar, or a barrel full of paper, adorned with the Queen’s head and plenty of promises?

For thousands of years, gold has meant money. In 1492, when Christopher Columbus set sail for the New World, his patron, King Ferdinand of Spain, told him: “Get gold – humanely if possible, but at all hazards, get gold!” In 1503, Columbus wrote to Ferdinand from Jamaica: “Gold is the most precious of all commodities. Gold constitutes treasure.”

Columbus understood gold’s inherent value.

Yes, it shines, but more importantly, it is rare and hard to mine. This gives it more value than, say, chocolate buttons, which are common and easy to make. Indeed, only 140,000 tons of gold have ever been mined. If it was one cube, the edges would measure just 19 metres.

Gold is susceptible, too – as the fall in value between 1988 and 2000 proved – but it has history.

It’s a reliable, old friend. So, in the 1930s, when everyone wanted gold, the US government issued the Gold Confiscation to stem its outflow. It “required all persons to deliver on or before May 1, 1933 all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve”.

Gold is like an inverse thermometer: when the economy drops, it shoots up. Pawnbrokers are basking in the glow. In June, Albemarle and Bond announced a 43 per cent year-on-year jump in revenue; in August, H&T announced a £1.3m profit rise in 2008’s first six months.

“A gold mine,” according to Mark Twain, “is a hole in the ground owned by a liar.” But that hasn’t stopped hundreds of punters heading to California, in the spirit of 1849, to pan for gold.

Three men died this summer trying to reopen an old gold mine. Warning: dollar signs in eyes may cause blindness.

So gold glides on, its sails billowed by fierce financial ill-winds, as Sensible People, with their houses and shares, sit tight and hope for the best. Meanwhile, Gordon Brown does his best statesman impression and hopes we forget he sold 395 tons of gold at the foot of recent times’ biggest price surge.